Consultant Zone

Mitigating risk

Standard and Poor’s have recently commented that the securitisation market during 2012 will remain slow due to wider market pressures, the fragile economic backdrop and subdued underlying mortgage lending, which will likely hold back RMBS issuance volumes.

In addition the costs of all types of funding remain high, and combined with tougher regulatory capital requirements, this may lead lenders to curb their lending or even shrink their balance sheets. Although this is not encouraging news at all, Standard and Poor’s did add that they thought UK RMBS issuance would increase modestly in 2012.

For those lenders and investors who are contemplating entrance or continuing activity in the securitisation market during 2012, it seems to us that preparation is key. This applies to the seller who needs to make sure that the information and data provided is accurate, and the buyer who needs to ensure that there is a genuine assessment of risk. In the past, there has been insufficient verification of data or due diligence carried out in trades and we have seen the results of some of that in the form of threatened legal action.

To get back to basics, the seller needs to ensure that they are providing accurate and reliable data and the buyer does not want to take the risk that the assets at face value are subject to inherent failings.

A truly independent review process can help and that is where we have helped both buyers and sellers over the last few years. We have been asked to review base data, the application of fees, the collection and loan modification processes and the interpretation of FSA Treating Customers Fairly (TCF) rules.

Identifying potential risks in the RMBS process has taken on a more significant role this year and we can see this continuing to improve the efficiency of the trading landscape.

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